Many community associations, including one you might live in, are concerned about their reserve accounts these days. Community associations collect fees from residents who live in a defined location, such as a condominium building or a neighborhood of homes, and use those funds to pay for emergency repairs and maintenance.
But with interest rates so low on traditional savings accounts, I’m hearing from some board members who are concerned they’re not making money on reserve accounts. If you had put $50 in a certificate of deposit three years ago, it might now be worth only $53.
It is indeed unfortunate that banks are paying next to nothing in interest for checking and savings accounts as well as CDs. But directors of these community associations should pause before moving their funds to more aggressive investments. Investing for a community association is not like investing your own personal money, because the association is accountable to all of the unit owners and has a fiduciary duty to invest the funds in a secure manner.
Community associations should obtain — at least once every five years — a reserve analysis study conducted by an engineer. This will tell the community how much money it needs to put into reserves on a yearly basis to be able to make the necessary repairs down the road. For example, if the reserve study finds that the elevators have a useful life of 20 years, and the estimated cost of replacement will be $60,000, the board must put $3,000 into the reserve account ($60,000 divided by 20).
One never knows when the reserve fund will have to be tapped to fix or replace a major component in the complex. If the funds are in equities (i.e. the stock market), they might actually be low on the day that the funds are needed. As I write this column, the market is volatile. Should the association need money today to pay for those broken elevators, or the replace the roof, there is always the possibility that the association will have lost money.
The risk of losing their members’ money should be a major concern for all boards of directors. They can breach their fiduciary duty to the members if the funds are not invested securely.
“Adequate reserve funding means more than just providing funds for roof replacements. In the long run it can contribute to the rise and fall of property values,” says the Community Association Institute, a national nonprofit group created to provide education and resources to our nation’s residential community associations. “For instance, if an association is in debt or has no reserve fund, educated home buyers may not want to invest in the community.”
It has issued a publication called “Reserves,” which I recommend to all community association board members. It can be found online at www.caionline.org.
And now that such agencies as the Federal Housing Administration are requiring associations to not only maintain adequate reserves but also obtain periodic reserve analysis studies, responsible investing becomes important if you want to obtain financing to buy or refinance a property in a community association.
Lenders who were burned badly in such areas as Florida, Nevada and California are looking very carefully at the financial picture of every community association. If a lender sees that the reserve funds are not invested securely, it could risk getting rejected on mortgage loan applications from that association by lenders.
The bottom line is: What you do with your own money is your business; but community associations must take a much more prudent approach.
Benny L. Kass is a Washington lawyer. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. For a free copy of the booklet “A Guide to Settlement on Your New Home,” send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036.